Why the Dallas Fed report shows manufacturing continues to recover

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The Dallas Fed manufacturing survey

The Dallas Fed conducts a monthly survey of manufacturers in Texas regarding their operations in the state to come out with the production index and the business activity index. About 100 manufacturers regularly participate in the Dallas Fed survey. Participants are asked their opinion on changes in certain manufacturing indicators over the previous month and their expectations for activity six months into the future. The break-even point for each index is zero, with positive numbers showing growth and negative numbers showing a decline.

The Dallas Fed Manufacturing Survey Production Index

 

The Dallas Fed report for July shows manufacturing continues to lead the recovery

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According to the latest release of the Dallas Fed manufacturing survey, momentum in the manufacturing sector carried over to July. The general business activity index edged up from 11.4 to 12.7, pushing to its highest level in ten months. The production index, a key measure of state manufacturing conditions, rose from 15.5 to 19.1. This shows output grew at a stronger pace than in June.

Expectations regarding future business conditions remained optimistic in July. The index of future general business activity inched up to 19.8. The index of future company outlook fell to 24.4 after reaching a multi-year high of 33.8 in June. Indexes for future manufacturing activity showed mixed movements in July but remained in solidly positive territory.

Investor’s takeaway

The Dallas Survey gives detailed information on Texas’ manufacturing sector, how busy it is, and where it’s headed. Since manufacturing is a major sector of the economy, this report has big influence on the markets. Some of the survey indices also provide insight on inflation pressures including prices paid, prices received, wages and benefits, and capacity utilization.

The Fed closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it’s an early clue to the nation’s manufacturing sector.

The performance of industrial ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Co. (GE) and Boeing Co. (BA) in its portfolio, the Vanguard Industrials Index Fund (VIS), and the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) serve as good indicators with respect to the industrial sector.

PMI

The next part of the series analyzes the Institute for Supply Management’s report on the Chicago PMI (or purchasing managers’ index) for July. Read on to see how this can affect your portfolio.

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